First mortgage basics

Learn about down payment options and mortgages before buying your first home.

Graduating from college and starting your career probably means your first mortgage is on the horizon. This is a huge financial milestone, so you should know what options you have when it comes to down payments and financing your home.

Down Payments
First, the larger the down payment you make, the lower your monthly payments will be. Also, if you make a down payment of 20 percent or more, you can avoid having to pay private mortgage insurance (PMI).

If you don’t have a lot of money to put down on a house, you still have several options. You can simply put down what you can afford and go ahead and pay PMI if that amount is less than 20 percent of the purchase price. You can also get an 80-10-10 mortgage, also called a piggyback mortgage. This mortgage allows you put 10 percent down on a home, and then get two separate mortgages for the remaining 10 and 80 percents. This way, you borrow enough to fulfill the 20 percent down requirement, and avoid paying PMI. Some lenders even offer 100 percent mortgages, where you are not required to have any down payment at all.

What can I afford?
Another thing to keep in mind is how paying your mortgage is going to affect your finances. There isn’t a hard and fast rule for how much you should spend on a home. Some experts will tell you that you shouldn’t spend more than two and a half times your total yearly income. Others will say that no more than 35 percent of your total monthly income should be spent on your living expenses, including utilities. Another way to determine how much you can afford is to get pre-approved. That way you will know what homes are in your price range.

Mortgage Options
Regardless of what percentage of your income you decide to spend on your first home, one of the most important things you can do is learn what the different types of mortgages mean for your finances and then choose the best mortgage for you.

• A fixed-rate mortgage lets you borrow money at an interest rate that stays the same for the life of the loan. 
• An adjustable-rate mortgage, or ARM, has rates that fluctuate according to general interest rates.
• A hybrid mortgage has fixed rates for a certain period of time and then switches to adjustable rates. For instance, the 5/1 ARM lets you pay a fixed rate for five years and then adjusts your rate once a year after that.
• An interest-only mortgage is a mortgage where you are expected to pay only the interest on a loan for a certain time period. During that time period, you will not be paying any money toward principal. After that predetermined time period, full payments will kick in.

Play with some numbers and research your options so you can make an informed decision about your mortgage.

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